Bond issuance to pave way for IPO
By Xu Dashan (China Daily)
Updated: 2004-04-28 09:35

China Construction Bank said it would raise its capital adequacy ratio to an "ideal level" before a planned initial public offering this year or next.

"We have been studying a plan to issue subordinate bonds, which we could use to increase capital adequacy," President Zhang Enzhao said at a press conference in Beijing yesterday.

The bank, which was chosen by the central government as a pilot project to turn it into a joint stock bank, won a US$22.5 billion bail-out from the government in late December.

The bank is also busy talking with foreign investors about a stake sale.

"An introduction of foreign companies as strategic investors is beneficial for increasing capital strength, optimizing capital structure and diversifying the ownership of our bank," Zhang said.

More importantly, foreign ventures seeking to invest could bring in advanced management practices and improve the bank's corporate governance, he said.

"Our goal is to establish a modern share-holding commercial bank that will make us a competitive heavyweight in the global financial market," he said.

According to Zhang, the time and venue of the bank's planned listing are yet to be decided.

The stock listing would be "confirmed when internal and external conditions are ideal," he said.

During the first quarter, the bank earned 15.97 billion yuan (US$1.9 billion) in operating profits, an increase of 32.4 per cent from a year ago.

By the end of March, the bank's non-performing loan ratio, by the international standard, was 8.77 per cent, a drop of 0.35 percentage points compared with the beginning of the year.

Economists said more profits but less non-performing loans are crucial for China Construction Bank.

Wang Zhao, a researcher with the State Council's Development Research Centre, said China's four largest State-owned commercial banks will have to sharpen their competitive edge before the end of 2005, when foreign banks will have market access under China's World Trade Organization commitments.

"The banks will have to lower the rate of non-performing loans, get rid of historical financial burdens and raise their capital adequacy to international standards," he said.

Commercial banks' capital adequacy ratios will have to reach 8 per cent, the minimum required by the Basel Capital Accord reached by international banking managers, according to the nation's commercial bank law.

Wang stressed that this goal will have to be achieved before China's commercial banks, especially the big four, get listed.

Chinese banks usually write off their NPLs by using bad loan reserves taken from their profits.

And more profits mean they can write off those non-performing loans more quickly, Wang said.

China Construction Bank is also exploring new ways to deal with bad assets.

Yang Xiaoyang, head of the bank's asset preservation department, said his bank would continue to hold two important "auction months" in the spring and fall to sell those mortgaged assets.

Last month, China Construction Bank kicked off a roadshow in New York and Tokyo to try to sell some of its non-performing assets to international investors.

The non-performing assets, with a book value of about 4.2 billion yuan (US$506 million), consist of 162 mortgaged real estate projects in the country's 58 major cities.

"Cutting bad loans is the first step by the bank to go public," said Dong Chen, an analyst with China Securities.

With an aim to become more competitive, Chinese commercial banks would have to step up business supervision and risk control measures.

They would also have to speed up establishment of corporate governance mechanisms, he said.

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